Before you jump into property development, have you thought about the commitments you’ll be making? Whilst this might sound daunting, you need to be aware of your responsibilities to the necessary stakeholders in your development [real estate agents, financers or lenders and the local government to name a few].
It’s a lot to get your head around, we know, but being aware of your obligations will save you in the long run, so it’s best to not skip this one.
To make things easier, this part of the series dives into some obligations you will have towards the people who buy into your development [generally during pre-sales to help you obtain finance], who then become part of the body corporate after they are registered owners.
key developer obligations to buyers
The Body Corporate and Community Management Act [BCCMA] was introduced in 1997 with the key objective of accommodating the establishment, operation and management of community titles scheme, which is achieved by several secondary objectives.
One of the secondary objectives of the BCCMA is to provide an appropriate level of consumer protection for owners and intending owners of lots [which is partly achieved by imposing greater obligations on developers].
Some of the statutory obligations you will be required to comply with include:
To give notice to the body corporate [if partly established] and buyers under contract of an intention to change the scheme in a way that if carried out, would affect the nature of the development or would not be consistent with the current development approval for the scheme.
An example of a section 29 notice that we have issued on behalf of a client was where the developer decided to change the last stage of development from a small number of townhouse/terrace style properties into a unit complex.
It’s okay if your vision for the development changes, but you need to make sure you keep everyone updated or potentially risk not being able to give effect to the change.
To exercise reasonable skill, care and diligence and act in the best interests of the body corporate when entering engagements with body corporate managers/service contractors or authorising a letting agent business.
It’s very common for developers to make arrangements for the body corporate to engage related parties as a caretaker for the scheme.
While this is generally acceptable, if you do decide to go down this path you need to make sure that any engagement is reasonable in the circumstances. For example, by obtaining a valuation to ensure the financial benefit received by the caretaker is not excessive.
To take out any insurance required from the date that the scheme is established for 12 months.
To provide buyers who are under contract with a further disclosure statement if it becomes apparent that information in the initial disclosure was inaccurate or the disclosure statement would no longer be accurate.
As we discussed earlier in the series, when selling OTP there are additional disclosure requirements than what’s required in an ordinary sale.
If you give disclosure and things change, you need to keep buyers up to date or they may be able to terminate the contract in certain circumstances.
Given the potential risks, this obligation should be considered before any changes are made [or proposed to be made] to a development.
A developer of a residential development owes what is known as a ‘fiduciary duty’ to the body corporate formed from their development.
A fiduciary relationship involves one party being in a position of power [in this case, you as the developer] and as a result, you are required to not take any steps that would further your interest where it may impact the interests of the body corporate.
As a result, you are required to act in the best interests of the body corporate and where there may be a potential conflict [for example in the appointment of a related entity as a caretaker], full disclosure must be made so people can make an informed decision about buying into the development.
The OTP contract you enter into with potential buyers will set out several obligations on you as the developer.
The terms of such contract will generally be the subject of negotiation between the parties, however, this is heavily influenced by market conditions and the number of interested buyers.
When there is less interest from potential buyers, the buyer and their representatives may be more inclined to request amendments that would result in more onerous obligations. These requests should be considered in detail before any concessions are made as they may negatively impact your position in the future, when conditions may have changed.
It is also important to note that the Australian Consumer Law can apply to OTP contracts, including the unfair contract provisions and this needs to be considered for any clauses in your contract.
The types of obligations that a standard OTP contract include the following:
- To enter into a building contract with a qualified/licensed builder for the construction of the buildings within the development.
- To ensure the lots are constructed in accordance with the disclosure documents provided to the buyer [noting that you would generally retain a discretionary right to make changes provided that a buyer is not materially prejudiced by these changes].
- To obtain a certificate of classification for building/s within the development.
- To arrange for plans and CMS to be sealed by the local government and registered with the Queensland Titles Registry.
The above contractual obligations are the minimum but before agreeing to anything more, you need to consider any requirements of your financier/lender. As part of obtaining finance, your financier/lender will generally require certain clauses before funding the loan.
Although the above is not every obligation property developers owe to those who are purchasing the development, it’s a good starting point covering some of the key legal requirements you ought to get your head around.
Whilst we haven’t touched on general [commercial] obligations, you should think about these as well, as they’ll impact the type of relationship you intend to have with your buyers.
Failure to consider your obligations toward your buyer may result in unexpected liabilities and could greatly impact the overall viability of the development.
we’re here to help
If you’re a developer looking for help navigating your legal obligations, give our Legal team a buzz on 1300BDEPOT or get in touch via email@example.com.
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General advice disclaimer
The information provided on this website is a brief overview and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision. Please consult with an appropriate professional before making any decision.